Why Email Marketing Generates the Best ROI

Last week, MGR Consulting Group, an Internet Marketing Agency based in Phoenix, AZ, USA, was named a 2014 Solution Provider All Star Award winner by Constant Contact®, Inc., the trusted marketing advisor to more than 600,000 small organizations worldwide. The award, given annually to the top 10% of Constant Contact’s international customer and Solution Provider base, recognizes these select organizations for their significant achievements in Email Marketing on behalf of its clients.

All of us at MGR are very proud of the achievement which we have now received for the third year in a row. However, I thought it would have more impact if I dust off my calculator and demonstrate with real numbers how Email Marketing generates the highest ROI for our clients.

For this example, I will consider a fictitious client that decides to create a monthly eNewsletter and start a new Email Marketing campaign for his company. The following numbers are just average numbers, but you can simply plug in your own numbers to calculate the ROI in your particular case.

Let’s assume that each eNewsletter requires an average of 5 hours of work from initial concept to completion. This includes the combined time for the writers/researchers to come up with the articles, the designers, the programmers, and the project manager that oversees the project. To keep the numbers simple, let’s assume that they hire a marketing agency to produce the newsletter and the average hourly rate of everyone working on the newsletter at the marketing agency is $100/hr.

Of course, because they’re hiring a marketing agency, for this particular purpose they can ignore other possible in-house costs such us overhead, personnel time, etc. Since they are creating an eNewsletter, the content will need to be hosted on a server and they will need an Email Marketing System or company to deploy it to their customer database. Now, let’s just put all the numbers together:

eNewsletter Monthly Investment

eNewsletter Production (Labor Costs): 5 hrs X $100 = $500

eNewsletter Hosting: $50/month

Email Marketing System: $50/month

Total Monthly Cost (per eNewsletter): $600

So far, the above costs represent the “Investment” or the “I” in ROI. Let’s now take a look at the “Return” side or in basic terms, the revenues that you can expect to generate from the eNewsletter.

Let’s assume that you send the eNewsletter to 5,000 leads in your customer database. From those 5,000 people, your “Open Rate” (that is people who actually open their email and see your eNewsletter) is 25%. That’s a good number to start from. So you have now 1,250 people that actually see your eNewsletter. But you haven’t made any money yet. Now we will estimate that from the 1,250 that read your eNewsletter, only 1% become customers. This is a very low number, but let’s just consider a worst-case scenario to see how we end up. So 1% of 1,250 is 12. Now we’re happy! You now have 12 customers that are contacting you so you can do some work for them!

But remember, our main goal is still to calculate our ROI, so somehow, we need to put a dollar figure to each customer. Let’s again assume that each new customer will spend around $1,000 over the course of the year working with your company. That would be your gross revenue from each customer. But we don’t care about gross revenues either. We DO care about PROFITS! At this point, you plug in your average profit margin. If you run an efficient company, you may enjoy at least a 25% profit margin. That is, for every $1,000 of revenue, your profit will be $250 on average. So back to the previous figure, from each new customer spending $1,000, you will net (or profit) around $250.

Now we have a lot of new numbers on the table so let’s get back to our drawing board:

eNewsletter Total Database: 5,000

eNewsletter Open Rate (25%): 1,250

eNewsletter Conversion Rate (1%): 12

Average Revenue per Customer Project: $1,000

Profit Margin: 25%

Average Profit per Customer: $250

Total Profit from Newsletter: $250 X 12 = $3,000

With all of the above figures, now we’re ready to calculate our ROI. The formula to calculate ROI is always the same no matter which project you want to calculate it for. Basically, ROI will be calculated by subtracting the (R)eturn minus the (I)nvestment and divided by the (I)nvestment (indicated as a percentage)

So in our case, it would be: ($3,000 – $600) / $600 = 400%

The Return on Investment for your eNewsletter would be a whopping 400% or four times your original investment! As you can see, in this particular case, it makes perfect sense for you to add a monthly eNewsletter to your overall Marketing Plan. And keep in mind that the numbers that I’ve used above are on the conservative side. If your conversion rate is 2% or your profit margin is higher than 25%, you can see how your ROI can easily double.

You will also notice that, as you start tracking and analyzing your ROI for your different Email Marketing campaigns over a period of time, the actual ROI figure may also grow each time. Your first marketing campaign may break even; subsequent campaigns may bring you a 5%-10% ROI. As your branding increases and your potential customers start warming up to your company and your products/services, your ROI will also increase accordingly. Planning and consistency is the key. You can’t expect to send a single eNewsletter one month and get outstanding results. But if you stick to your long term plan and make adjustments along the way, your efforts will surely pay off.